Kratos' revenues and Adjusted EBITDA for the fourth quarter of 2017 were $202.2 million and $17.8 million, respectively. Fourth quarter 2017 revenues increased 11.0 percent over the fourth quarter of 2016 and 3.1 percent sequentially over the third quarter of 2017. Fourth quarter 2017 Adjusted EBITDA increased 32.8 percent over the fourth quarter of 2016 and 22.8 percent sequentially over the third quarter of 2017.

Kratos' Unmanned Systems Division (KUSD) generated year over year revenue growth of 65.9 percent, from $25.5 million in the fourth quarter of 2016 to $42.3 million in the fourth quarter of 2017. KUSD's Adjusted EBITDA of $4.1 million, or 9.7 percent of revenue, in the fourth quarter of 2017, increased 86.4 percent over
Adjusted EBITDA of $2.2 million in the fourth quarter of 2016. Kratos' largest segment, Kratos Government Solutions (KGS), which includes Kratos Satellite Communications, Microwave Electronics and Training Systems businesses generated fourth quarter 2017 Adjusted EBITDA of $12.6 million, increasing sequentially 85.3 percent from the third quarter of 2017.

Kratos reported full fiscal year 2017 revenues of $751.9 million, increasing 12.4 percent from $668.7 million in fiscal year 2016. Adjusted EBITDA increased $9.4 million, or 20.9%, from $45.0 million in fiscal year 2016 to $54.4 million in fiscal year 2017. For fiscal year 2017, approximately 60% of Kratos' revenue was derived from
U.S. Federal Government related customers, approximately 29% from commercial, state and local government customers, and approximately 11% from international customers.

In the fourth quarter of 2017, as a result of the Company's annual impairment test of the carrying value of its goodwill balances, the Company recorded a non-cash impairment charge of $24.2 million related to its Defense Rocket Support Services (DRSS) business within the KGS segment. The majority of DRSS's business and revenue includes Kratos' legacy government services business, which the Company has considered a non-core business and has de-emphasized since 2012.

For the full fiscal year 2017, Adjusted EPS* was $0.12 and net loss per share was $0.48. Net loss was $42.7 million. For the
fourth quarter of 2017, Adjusted EPS* was $0.09 and net loss per share was $0.21. Net loss was $22.2 million, which included the loss on extinguishment of debt of $15.2 million related to the Company's refinancing of its Senior Secured Notes to replace its existing 7% Notes with 8-year 6.5% Notes, and included the $24.2 million impairment of goodwill.

Eric DeMarco, Kratos' President and CEO, said, "Kratos' fourth quarter and full year 2017 performance clearly demonstrated the continued upward trajectory of our Company and the successful execution of our strategy to build a business specializing in the rapid development, demonstration and fielding of affordable products and systems for national security. With the pending divestiture of PSS, Kratos
is now primarily a pure play defense systems, product, technology and intellectual property company focused on well-funded mission critical DoD priority areas; including high performance unmanned aerial drone systems, satellite communications, missile defense, training systems and microwave electronics. Each of these markets, where Kratos is an industry leader, is expected to experience significant funding increases and growth, and continue to be long term, high priority areas."

Mr. DeMarco concluded, "We closed 2017 and began 2018 with many significant contract wins, including a $93 million, an $81 million, a $24.3 million and a $23 million unmanned aerial drone system award. Accordingly, for 2018, we are focused on execution, operational excellence and continued improved
financial performance, and we expect Kratos' revenues and Adjusted EBITDA to continue to organically grow, profit margins to expand and a return to positive cash flow generation."

Financial Guidance

The Company also announced today that it has signed a definitive agreement to divest its PSS business for net cash proceeds of approximately $70 million, which transaction is expected to close in the next 90 days, contingent on customary closing conditions and regulatory approvals. As a result of the announced divestiture, PSS will now be reflected as a discontinued operation going forward in the Company's financial statements. Accordingly, all prior year comparative data in future financial statements will be recast to reflect this business as discontinued operations for all periods presented. Kratos' PSS business was
forecast to achieve full year 2018 revenues and Adjusted EBITDA of approximately $140 to $150 million, and $9 to $12 million, respectively. Kratos' PSS business generated full year 2017 revenues and Adjusted EBITDA before corporate overhead costs of $149.9 million and $6.9 million, respectively. As a result of the pending sale, Kratos' 2018 Q1 and full year financial guidance provided today excludes PSS, as does all other financial information noted below.

Kratos' first quarter 2018 financial guidance for revenues excluding the PSS business is $140 to $150 million, as compared to $132.0 million for the first quarter of 2017, and first quarter 2018 Adjusted EBITDA guidance of $9 to $11 million, as
compared to $10.2 million for the first quarter of 2017. Kratos' full year 2018 financial guidance for revenues excluding the PSS business is $640 to $650 million, as compared to $603.2 million for the full year of 2017, and full year 2018 Adjusted EBITDA guidance of $55 to $59 million, as compared to $47.5 million for the full year of 2017. Kratos is forecasting 2018 positive cash flow from operations of $35 to $45 million.

Management will discuss the Company's fourth quarter and fiscal year 2017 financial results, first quarter and full year 2018 guidance in a conference call beginning at 2:00 p.m. Pacific (5:00 p.m. Eastern) today. Analysts and institutional investors may participate in the
conference call by dialing (866) 393-0674, and referencing the call by ID number 9678809. The general public may access the conference call by dialing (877) 344-3935 or on the day of the event by visiting www.kratosdefense.com for a simultaneous webcast. A replay of the webcast will be available on the Kratos web site approximately two hours after the conclusion of the conference call.

About Kratos Defense & Security Solutions

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) develops transformative, affordable technology for the Department of Defense and commercial customers. Kratos is changing the way breakthrough technology for these industries is brought to market through proactive research and a streamlined development process. Kratos specializes in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, training and combat systems. For more information go to www.kratosdefense.com.

Notice Regarding Forward-Looking Statements

This news release contains certain forward-looking statements that involve risks and uncertainties, including, without limitation, express or
implied statements concerning the Company's expectations regarding its future financial performance, including the Company's expectations of the first quarter and full year 2018 revenue, Adjusted EBITDA and Adjusted EPS, and ability to generate positive cash flow from operations in 2018, the Company's ability to achieve projected growth in certain of the Company's business units and the expected timing of such growth, its bid and proposal pipeline, demand for its products and services, including the Company's ability to successfully compete in the tactical unmanned aerial system area and expected new customer awards, performance of key contracts, including the timing of production and demonstration related to certain of the Company's contracts and product offerings, the impact of the Company's restructuring efforts and cost reduction measures, including its ability to improve
profitability and cash flow in certain business units as a result of these actions, benefits to be realized from the Company's net operating loss carryforwards and the availability and timing of government funding for the Company's offerings, timing of LRIP related to the Company's unmanned aerial target system offerings, as well as the level of recurring revenues expected to be generated by these programs once they achieve full rate production, ability to close the pending divestiture of its PSS business, and market and industry developments, including projected growth. Such statements are only predictions, and the Company's actual results may differ materially from the results expressed or implied by these statements. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. Factors that may cause the Company's results to differ include, but are not limited to: risks to our business and financial results related to the reductions and other spending constraints imposed on the U.S. Government and our other customers, including as a result of sequestration, the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks associated with debt leverage and expected cost savings and cash flow improvements expected as a result of the refinancing of our Senior Notes and the repurchase of Senior Notes; risks that our cost-cutting initiatives will not provide the anticipated benefits; risks that changes, cutbacks or delays in spending by the U.S.DoD may occur, which could cause delays or cancellations of key government contracts; risks of delays to or the cancellation of our projects as a result of protest actions submitted by our competitors; risks that changes may occur in Federal government (or other applicable) procurement laws, regulations, policies and budgets; risks of the availability of government funding for the Company's products and services due to performance, cost growth, or other factors, changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget
Control Act of 2011, as amended); risks of increases in the Federal government initiatives related to in-sourcing; risks related to security breaches, including cybersecurity attacks and threats or other significant disruptions of our information systems, facilities and infrastructures; risks related to our compliance with applicable contracting and procurement laws, regulations and standards; risks relating to contract performance; risks related to failure of our products or services; risks associated with our subcontractors' or suppliers' failure to perform their contractual obligations, including the appearance of counterfeit or corrupt parts in our products; changes in the competitive environment (including as a result of bid protests); failure to successfully integrate acquired operations and competition in the marketplace, which could reduce revenues and profit margins; risks that
potential future goodwill impairments will adversely affect our operating results; risks that anticipated tax benefits will not be realized in accordance with our expectations; risks that a change in ownership of our stock could cause further limitation to the future utilization of our net operating losses; risks that the current economic environment will adversely impact our business; risks that we are not able to close the pending divestiture of the PSS business on our anticipated timeline or at all; and risks related to natural disasters or severe weather. These and other risk factors are more fully discussed in the Company's Annual Report on Form 10-K for the period ended December 31, 2017, and in our other filings made with the Securities and Exchange Commission.

Note Regarding Use of Non-GAAP Financial Measures

This news release contains non-GAAP financial measures, including Adjusted income (loss) per share (computed using income (loss) from continuing operations before income taxes, excluding amortization of intangible assets and capitalized contract and development costs, stock compensation expense, loss on extinguishment of debt, contract design retrofit costs, acquisition and restructuring related items and other, and impairment of goodwill, which includes but is not limited to unused office space expense, excess capacity, investments in unmanned combat systems initiatives, and foreign transaction gains and losses, less the estimated tax cash payments) and Adjusted EBITDA (which excludes, among other things, losses and gains from discontinued operations, restructuring and transaction related items, investments in unmanned combat systems
initiatives, stock compensation expense, unused office space expense, impairment of goodwill, loss on extinguishment of debt, and foreign transaction gains and losses, and the associated margin rates). Additional non-GAAP financial measures include Revenues and Adjusted EBITDA related to our PSS business. Kratos believes this information is useful to investors because it provides a basis for measuring the Company's available capital resources, the actual and forecasted operating performance of the Company's business and the Company's cash flow, excluding extraordinary items and non-cash items that would normally be included in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles. The Company's management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures
in evaluating the Company's actual and forecasted operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and investors should carefully evaluate the Company's financial results calculated in accordance with GAAP and reconciliations to those financial statements. In addition, non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in this news release.

*Adjusted earnings per share (Adjusted EPS) excludes loss from
discontinued operations, non-cash amortization expenses, as the Company has historically been acquisitive, non-cash stock compensation costs, foreign transaction gains and losses, certain non-recurring items such as acquisition and restructuring related items and other, the loss on extinguishment of debt, and the non-cash impairment of goodwill, and includes cash actually expected to be paid for income taxes on continuing operations, reflecting the benefit of the Company's net operating loss carryforwards of over $300 million. Kratos believes that reporting adjusted income (loss) per share is a meaningful metric to present the Company's financial results.

with the intention of retaining the
intellectual property and data package rights of the technology it is developing. Management believes these rights

will result in securing future sole source positions on new platforms which will provide an attractive rate of return. Management believes that these

costs are not indicative of ongoing operating results.

Contract design retrofits.The Company makes certain design retrofits primarily related to its development programs in its Unmanned Systems business

which are necessary for the final design and configuration of these vehicles. Management believes that these costs are not indicative of ongoing

operating results.

Impairment of goodwill. As management has de-emphasized its legacy government services business since 2012 and has considered this business non-core,

management believes that this non-cash charge is not indicative of ongoing operating results.

Adjusted EBITDA is a non-GAAP financial measure and should not be
considered in isolation or as a substitute for financial information provided in

accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other

companies. The Company expects to continue to incur expenses similar to the Adjusted EBITDA financial adjustments described above, and investors

should not infer from the Company's presentation of this non-GAAP financial measure that these costs are unusual, infrequent, or non-recurring.

Reconciliation of Net income (loss) to Adjusted EBITDA is as follows:

Three Months Ended

TwelveMonths Ended

December 31,

December 25,

December 31,

December 25,

2017

2016

2017

2016

Net loss

$

(22.2

)

$

(4.3

)

$

(42.7

)

$

(60.5

)

Income (loss) from discontinued operations, net of income taxes

(0.1

)

(0.1

)

0.1

0.1

Interest expense, net

5.5

8.6

28.6

34.7

(Income) loss on extinguishment of debt

15.2

(0.2

)

17.3

(0.2

)

Provision (benefit) for income taxes from continuing operations

(11.7

)

0.8

(8.2

)

8.1

Depreciation (including cost of service revenues and product sales)

3.0

2.9

12.1

12.3

Stock-based compensation

1.0

0.9

7.8

5.1

Foreign transaction (gain)/loss

0.2

0.1

(0.4

)

(0.4

)

Amortization of intangible assets

2.5

2.6

10.4

10.5

Amortization of capitalized contract and development costs

0.2

-

0.5

-

Impairment of goodwill

24.2

-

24.2

Acquisition and restructuring related items and other

-

2.1

4.7

35.3

Adjusted EBITDA

$

17.8

$

13.4

$

54.4

$

45.0

Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA:

Three Months Ended

TwelveMonths Ended

December 31,

December 25,

December 31,

December 25,

2017

2016

2017

2016

Acquisition and transaction related items

$

-

$

-

$

0.3

$

-

Excess capacity and restructuring costs

-

2.1

4.4

13.4

Litigation related
items

-

-

-

1.9

Investment in unmanned combat systems

-

-

-

20.0

$

-

$

2.1

$

4.7

$

35.3

Kratos Defense & Security Solutions, Inc.

Unaudited Segment Data

(in millions)

Three Months Ended

TwelveMonths Ended

December 31,

December 25,

December 31,

December 25,

2017

2016

2017

2016

Revenues:

Unmanned
Systems

$

42.3

$

25.5

$

121.7

$

75.8

Kratos Government Solutions

123.9

124.4

480.3

465.8

Public Safety & Security

36.0

32.2

149.9

127.1

Total revenues

$

202.2

$

182.1

$

751.9

$

668.7

Operating income (loss) from continuing operations:

Unmanned Systems

$

2.1

$

(0.1

)

$

(3.0

)

$

(27.7

)

Kratos Government Solutions

(15.3

)

6.9

1.7

17.3

Public Safety & Security

1.0

(1.3

)

3.8

(3.0

)

Unallocated corporate expense, net

(1.0

)

(0.9

)

(8.3

)

(5.2

)

Total operating income (loss) from continuing operations

$

(13.2

)

$

4.6

$

(5.8

)

$

(18.6

)

Note: The operating performance for Kratos Government Solutions for the three months and twelve months ended December 31, 2017 includes the non-cash impairment of goodwill of $24.2 million. Unallocated corporate expense, net includes costs for certain stock-based compensation programs
(including stock-based compensation costs for stock options, employee stock purchase plan and restricted stock units), the effects of items not considered part of management's evaluation of segment operating performance, merger and acquisition expenses, corporate costs not allocated to the segments, and other miscellaneous corporate activities.

Reconciliation of consolidated Adjusted EBITDA to Adjusted EBITDA by segment is as follows:

Three Months Ended

TwelveMonths Ended

December 31
,

December 25,

December 31,

December 25,

2017

2016

2017

2016

Unmanned Systems

$

4.1

$

2.2

$

6.8

$

2.2

% of revenue

9.7

%

8.6

%

5.6

%

2.9

%

Kratos Government Solutions

12.6

12.1

43.0

43.1

% of revenue

10.2

%

9.7

%

9.0

%

9.3

%

Public Safety & Security

1.1

(0.9

)

4.6

(0.3

)

% of revenue

3.1

%

(2.8

)%

3.1

%

(0.2

)%

Total Adjusted EBITDA

$

17.8

$

13.4

$

54.4

$

45.0

% of revenue

8.8

%

7.4

%

7.2

%

6.7

%

Kratos Defense & Security Solutions, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in millions)

December 31,

December 25,

2017

2016

Assets

Current assets:

Cash and cash equivalents

$

129.6

$

69.1

Restricted cash

0.4

0.5

Accounts receivable, net

268.4

229.4

Inventoried costs

50.4

55.4

Prepaid expenses

12.9

8.9

Other current
assets

9.6

9.8

Total current assets

471.3

373.1

Property, plant and equipment, net

61.2

49.8

Goodwill

461.2

485.4

Intangible assets,
net

22.0

32.6

Other assets

8.3

7.7

Total assets

$

1,024.0

$

948.6

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

48.8

$

52.7

Accrued expenses

45.6

50.0

Accrued compensation

34.8

39.1

Accrued interest

1.7

3.6

Billings in excess of costs and earnings on uncompleted contracts

47.2

41.8

Other current liabilities

9.7

7.7

Other current liabilities of discontinued operations

1.1

1.6

Total current liabilities

188.9

196.5

Long-term debt principal, net of current portion

293.5

431.0

Other long-term liabilities

26.3

41.0

Other long-term liabilities of discontinued operations

3.8

3.7

Total liabilities

512.5

672.2

Commitments and contingencies

Stockholders' equity:

Common stock

-

-

Additional paid-in capital

1,233.7

956.2

Accumulated other comprehensive loss

(1.4

)

(1.7

)

Accumulated deficit

(720.8

)

(678.1

)

Total stockholders' equity

511.5

276.4

Total liabilities and stockholders' equity

$

1,024.0

$

948.6

Kratos Defense & Security Solutions, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in millions)

TwelveMonths Ended

December 31,

December 25,

2017

2016

Operating activities:

Net loss

$

(42.7

)

$

(60.5

)

Less: loss from discontinued operations

(0.1

)

(0.1

)

Loss from continuing operations

(42.6

)

(60.4

)

Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations: